United Technologies 2012 Annual Report Download - page 95

Notes to Consolidated Financial Statements 2012 ANNUAL REPORT 93
of service and product warranties and product performance guaran-
tees for the years ended December 31, 2012 and 2011 are as
follows:
(DOLLARS IN MILLIONS) 2012 2011
Balance as of January 1 $ 1,468 $ 1,136
Warranties and performance guarantees issued 325 475
Settlements made (277) (440)
Other (184) 297
Balance as of December 31 $ 1,332 $ 1,468
The decrease in the above table in “Other” during the year
ended December 31, 2012 primarily reflects a decrease for Clipper
warranty reserves as a result of the sale of the company, partially
offset by an increase from the Goodrich acquisition. See Note 3
and Note 2, respectively, for further discussion. The increase
reflected in “Other” during the year ended December 31, 2011
primarily reflected the impact of finalizing purchase accounting on
the original acquisition of Clipper.
NOTE 17: COLLABORATIVE ARRANGEMENTS
In view of the risks and costs associated with developing new
engines, Pratt & Whitney has entered into certain collaboration
arrangements in which sales, costs and risks are shared. Sales
generated from engine programs, spare parts, and aftermarket
business under collaboration arrangements are recorded as earned
in our financial statements. Amounts attributable to our collabo-
rators for their share of sales are recorded as an expense in our
financial statements based upon the terms and nature of the
arrangement. Costs associated with engine programs under
collaborative arrangements are expensed as incurred. Under these
arrangements, collaborators contribute their program share of
engine parts, incur their own production costs and make certain
payments to Pratt & Whitney for shared or joint program costs. The
reimbursement of the collaborators’ share of program costs is
recorded as a reduction of the related expense item at that time. As
of December 31, 2012, the collaborators’ interests in all commercial
engine programs ranged from 14% to 48%, inclusive of a portion of
Pratt & Whitney’s interests held by other participants. Pratt & Whit-
ney is the principal participant in all existing collaborative arrange-
ments. There are no individually significant collaborative
arrangements and none of the collaborators exceed a 31% share in
an individual program.
On June 29, 2012, Pratt & Whitney, Rolls-Royce, MTU, and
JAEC, participants in the IAE collaboration, completed a restructur-
ing of their interests in IAE. Under the terms of the agreement,
Rolls-Royce sold its ownership and collaboration interests in IAE to
Pratt & Whitney, while also entering into an agreement to license its
V2500 intellectual property to Pratt & Whitney. In exchange for the
increased ownership and collaboration interests and intellectual
property license, Pratt & Whitney paid Rolls-Royce $1.5 billion at
closing with additional payments due to Rolls-Royce conditional
upon each hour flown by V2500-powered aircraft in service at the
closing date of the purchase from Rolls-Royce during the fifteen
year period following closing of the purchase. The collaboration
interest and intellectual property licenses are reflected as intangible
assets and will be amortized in relation to the economic benefits
received over the remaining estimated 30 year life of the V2500
program. Rolls-Royce will continue to support the program as a
strategic supplier for the V2500 engine and continue to manu-
facture parts and assemble engines. Pratt & Whitney entered into a
collaboration arrangement with MTU with respect to a portion of the
acquired collaboration interest in IAE for consideration of approx-
imately $233 million with additional payments due to Pratt & Whit-
ney in the future. As a result of these transactions, Pratt & Whitney
holds a 61% net interest in the collaboration and a 49.5% owner-
ship interest in IAE. Please see Note 2 for further discussion of
changes in the IAE collaboration arrangement.
The following table illustrates the income statement classi-
fication and amounts attributable to transactions arising from the
collaborative arrangements between participants for each period
presented:
(DOLLARS IN MILLIONS) 2012 2011 2010
Collaborator share of sales:
Cost of products sold $ 1,295 $ 963 $ 850
Cost of services sold 216 36 38
Collaborator share of program costs
(reimbursement of expenses incurred):
Cost of products sold (97) (88) (83)
Research and development (203) (220) (135)
Selling, general and administrative (7) (4) (5)
NOTE 18: CONTINGENT LIABILITIES
Leases. We occupy space and use certain equipment under lease
arrangements. Rental commitments of $2,486 million at
December 31, 2012 under long-term non-cancelable operating
leases are payable as follows: $646 million in 2013, $510 million in
2014, $378 million in 2015, $255 million in 2016, $158 million in
2017 and $539 million thereafter. Rent expense was $457 million in
2012, $453 million in 2011 and $445 million in 2010.
Additional information pertaining to commercial aerospace
rental commitments is included in Note 5 to the Consolidated
Financial Statements.
Environmental. Our operations are subject to environ-
mental regulation by federal, state and local authorities in the United
States and regulatory authorities with jurisdiction over our foreign
operations. As described in Note 1 to the Consolidated Financial
Statements, we have accrued for the costs of environmental
remediation activities and periodically reassess these amounts. We
believe that the likelihood of incurring losses materially in excess of
amounts accrued is remote. At December 31, 2012, we had $847